Billabong Founder Loses Case Over Tax Schemes ‘Suggested’ by EY

In a significant legal development, the Federal Court of Australia has ruled against Gordon Merchant, the founder of global surfwear brand Billabong, over tax schemes he utilized to offset an A$85 million (US$56.7 million) capital gain, which were based on advice from Ernst & Young (EY).

The ruling, delivered on Tuesday, May 14, 2024, concludes a dispute surrounding a A$45 million amended tax assessment issued after an Australian Taxation Office (ATO) audit of nine companies under the Merchant Group in 2017.

Merchant's strategy involved his Merchant Family Trust (MFT) in an asset wash, which entailed selling A$5.8 million in Billabong shares to his self-managed super fund. The ATO believed this move was designed to crystallize a A$56.6 million capital loss, which was subsequently used to offset the capital gain from the MFT’s sale of Merchant’s shares in the bioplastics company Plantic Technologies to Kuraray.

The court noted that EY had previously advised on structuring the future sale of Plantic for Merchant’s benefit. The advice included the MFT selling its shares in Plantic rather than Plantic selling its assets and involved forgiving approximately A$55 million in loans from Merchant Group entities to Plantic. Additionally, the Gordon Merchant Superannuation Fund acquired high-cost shares in Billabong Limited from the MFT, resulting in the MFT crystallizing a substantial capital loss.

According to testimony, Merchant’s investment adviser Luke McGrath indicated that EY suggested the transaction structure. "Mr McGrath considered that EY was recommending that the transaction occur in order to create the capital loss," stated Justice Tom Thawley in his judgment. Thawley applied section 177D of the Income Tax Assessment Act, concluding that the MFT obtained a tax benefit from the Billabong share sale scheme and entered the scheme primarily to gain this tax benefit.

Merchant was represented by Cooper Grace Ward Lawyers, while Gadens represented the Commissioner of Taxation.

In parallel, Merchant has also initiated a separate lawsuit against EY and its former tax partner Ian Burgess in the Queensland Supreme Court, alleging negligent advice and seeking approximately A$58 million in damages. As per Justice Thawley’s ruling, the proceedings against EY have been stayed for 40 days from the date of the Merchant judgment.

By fLEXI tEAM